Business Taxes, Part II of III on year-end tax planning

This is Part II of three parts on year-end tax planning under the Tax Cut and Jobs Act. In our first part, we discussed the impact of the new law on personal taxes. In this part, we focus on small businesses.

Choice of Entity for Small Businesses

One of the biggest changes from the new tax law is the massive reduction in the tax rate for regular or “C” corporations. That may sound very appealing, but does this mean you should convert your S Corp. or LLC into a C Corp.? It could, if you expect to keep net income in your business.

If that is not your plan, i.e., if you want to take out money for yourself and other members, then use a pass-through entity instead of a C Corp. While a C Corp. may only pay taxes of 21% on its income, the amount the C Corp. distributes, via dividends or otherwise, will be taxed again to shareholders. If the shareholders are in the highest bracket, then income that started in the corporation had to pay over 52% in total taxes before getting into shareholders pockets. If you are a pass-through such as an LLC or partnership, then no tax is imposed at the entity level and entity members may qualify for the QBID on their personal returns – see below.

Be clear on your goals: do you want to leave net income in to grow the business for sale or an IPO? Or do you want to distribute net income to business members?  Deciding makes the choice clear.

Section 199A QBID

In our first part, we discussed the qualified business income deduction of 20% for certain pass-entities.. The deduction is complicated and subject to limitation. One such limitation is the total income of the taxpayer reported on her individual or joint tax return. The deduction phases out for high income taxpayers, starting at $157,500 of income for single taxpayers and $315,000 for married taxpayers, and phasing out when income exceeds $207,500 for single taxpayers and $415,000 for married taxpayers. There are wage and capital limits that can bring back a deduction when the phase out is exceeded, but that does not help service businesses as discussed below.

The deduction is “below the line,” so it does not reduce self-employment taxes or any items that are keyed to adjusted gross income (“AGI”). It also does not affect net operating losses.

Another limit is on income from a service business. This is defined as income from the following:

Health, law, accounting, consulting, financial services, performing arts, actuarial science, athletics, brokerage services, investing or trading in securities, or any business where the principal asset is the reputation or skill of its employees (there are now regulations on this last type, but those do not answer all questions).

Architects and engineers were excluded from the list in the final bill.

For those within the definition of service business, QBID drops to zero when the phase out is exceeded.

If you are bumping up against any limits for 2018, you will want to review ways to defer income to 2019 or reduce taxable income in 2018 by increasing your deductions.

Businesses use of Home

The new tax law imposes limits on Schedule A deductions, including state and local income and real estate taxes. If some of your real estate taxes otherwise subject this limit are for a home office or other business use, then the business portion is not limited and can be used to shelter business income.

New Rules on Entity-level Audits

Under the new tax law, LLCs and partnerships face substantial changes for the IRS audit procedures:

  1. Beginning in 2018, the IRS can audit such entities at the partnership or LLC level under the Centralized Partnership Audit Rules or “CPAR.” This gives the IRS new powers, one of which is the ability to impose a tax at the entity level and let the partners sort it all out, rather than the pre-2018 requirement to audit each partner; and
  2. The IRS would contact the Partnership Representative for the entity. If no PR has been designated, then the entity loses by default.

This means (a) updating your operating agreement to designate the PR in place of the tax matters partner and (b) electing out of the CPAR rules on your 2018 tax filing to avoid application of these unfavorable rules.

What is a WISP?

You have probably received e-mails and other notices asking you to review updated privacy policies from various vendors. Many of these were generated in response to adoption of the GDPR (General Data Protection Regulation) by the European Union in May of 2018.

What too few companies know is that there are laws in the US that require implementation of privacy safeguarding. One affecting companies doing business in Massachusetts is the Standards for the Protection of Personal Information of Residents of the Commonwealth in force since 2010.

If you are affected and have not either established or reviewed your company’s WISP (written information security program), please act right away to avoid liability for any potential breach.  Also, check the laws of any other state in which your do business to see what laws apply to your use of personal information.

Conclusion

If any of this raises questions for your year-end planning, let me know. I will be glad to see if can help.

Facebook page for our law firm

We are excited to announce the Facebook page for our law firm.

We hope you use this to keep informed about changes in the tax law and other financial planning issues.

Please check it out and “like” the new page.  Also, feel free to give us feedback.

Thank you

Impact of New Tax Law, Part I of III on year-end tax planning

New Tax Law

The Tax Cut and Jobs Act made substantial changes to tax rates, deductions and credits for individuals, corporations and other entities. It also affected changes to estate taxes. For a summary of all changes, please see our post from December in 2017 year-end tax planning – a year of uncertainty.  Please also see the other parts of this series:  in the second part, we discussed planning for small businesses; in the third part, we provided a practical guide for year-end action; and in Tax Planning Hacks, we discussed planning ideas for your Itemized Deductions and more.

The purpose of this post is to get you started on year-end planning to take advantage of the TCJA changes.

What is the Impact of New Tax Law?

We have been reviewing the impact of the new law with projections in our CCH ProSystem Fx tax software. While many individuals lose deductions in 2018 that they were previously allowed, that does not mean that their taxes increase as much they feared. Here are some reasons why:

  • They probably do not owe the AMT as they have in the past.
  • The change in rates lowers total taxes for many.
  • The passthrough deduction discussed below can make a big change.

If you want us to review the impact on your taxes, please let me know.

Clarifications on New Tax Law

Mortgage interest remains deductible even on an equity line of credit (ELOC), provided proceeds from the ELOC were used to purchase or substantially improve your home. However, if the proceeds were used for consumption, then the interest is not deductible.

The deduction for state and local income taxes (SALT) and property taxes is capped at $10,000. However, property taxes for rental properties are still fully deductible against rental income on Schedule E. And farmers and self-employed taxpayers can still deduct the business portion of the taxes on Schedules F and C. Finally, you may be able to use a trust to share ownership of a property with beneficiaries so that they can deduct a portion of the property taxes.

Change for Small Businesses

One of the biggest changes is the qualified business income deduction (“QBID”) under section 199A, also know as the pass-through deduction. This deduction reduces taxable income from qualifying businesses by 20% for taxpayers under the income limitations. This is, net profits form the business after any W-2 salary paid to the owners is reduced.

Pass through businesses include sole proprietors, S corporations, LLCs and partnerships. They also include real estate investment trusts (“REITs”) and certain publicly traded partnerships (“PTP”). But there are income limits and thresholds that eliminate the QBID service companies. Here is a good chart on that may help you see if you qualify for the 20% deduction. Also, watch for more in our next post.

Planning under 199A for QBID

If you have a pass-through business and your year-end planning shows that you may hit the income limits that reduce or eliminate the deduction, you can move income and deductions for Schedule A to change that. Push income into next year and bring any deductions from next year into this year. If you succeed in getting back under the income the limitation, you get a 120% benefit for the right offs – that is, 100% deduction value on Schedule A and 20% QBID value.

The income limits are toughest on service companies. If your small business is a service company, you may want to break out any non-service business to get the benefit of QBID. A professional office that does billing, debt collection or operates a professional building may be able to put those activities in separate entities that qualify for QBID. Furthermore, if your small business is considering buying an office, keep that in a separate entity from the business.

Conclusion

Watch for Part II coming soon. In the meantime, please contact us if you have any questions.

Getting unbiased advice on your finances

Unlike many sources of financial planning guidance, we do not charge a fee based on your assets or a commission for purchasing investments or insurance. We will help you set up investments and find the insurance that you need. For all our help, we simply charge for our time.

Why pay for financial advice when you can get it on the internet for free

(she’s thinking about the question)

Many investment firms have websites offering free advice on managing your finances. However, nothing on the internet is truly free. The advice may direct you to investments from which the firm receives a commission or the website may be a lead generation site.

What is lead generation?

Awhile back, I did a post on how a website that provides “free” use of a gamified retirement calculator. Using the calculator was fun and free. However, when you delved deeper, reading the company’s ADV disclosure, you learned that the website may receive referral fees from vendors for referring users to financial products, such as lenders for a user who needs to refinance her mortgage or Schwab, Fidelity or TD Ameritrade for users who want to rollover a 401(k). In other words, the site generates leads for which it gets paid. That hardly sounds free!

When to pay

If free is not the answer, that means you pay for advice. That can be good, because when you are the sole source of compensation, then planner has no hidden agenda – she serves your needs only.

I know finances are not fun and planning sounds like bad homework, so paying only makes it worse. At the same time, I see how spending the time to plan can make peoples lives so much better.

I hope you contact me and let me know what you think.

Fighting cancer the Pan-Mass Challenge way – my post on “why I PMC”

When asked the question, “why do you PMC,” I was not sure my reasons are special. Everyone faces cancer, either directly or with family and friends. But as I thought more, I realized I have a story about how I became such a committed PMC-er.

I am a cancer survivor; I had a tumor removed from my cheek in 2003. The day I was told I had cancer changed my life forever. But that did not make me a PMC-er. No, I only donated when my friend Mark asked me to contribute to his PMC ride.

But then, my best friend, Alan, was diagnosed with multiple myeloma. He had terrific care from Dana Farber. But, after three years, it became clear that he was on the verge of losing his battle to cancer and he was back in the hospital.

At the same time, Mark sent an e-mail about his PMC ride. I said, “I’m in.” He responded, “to ride or to donate.” Initially I thought, “to donate, of course.” But, after some reflection, I responded, “to ride!” So, in January of 2015, I told Alan that I was building a road bike and riding in his name. He died a few weeks later.


A photo of Alan working on a 1973 Alfa Romeo that I owned

Keep in mind that I was a mountain bike rider, used to slow rides over rocks and roots. On my first time out on a road bike, I did 15 miles in an hour and thought it was such effort that I could not imagine ever completing the 192 PMC ride that August.

So, I trained. And not only did I make that PMC ride, I have done two more after. Now, I am preparing for my fourth ride. In fact, I rode almost 4,500 miles last year to train for the two-day event in August.

Me, thrilled to finish the B2VT ride

My commitment to the PMC ride gets more serious each year. Two years ago, I started working with a coach to train, and hired a dietician to eat better. And when Mark formed Team THANKS, I joined (learn more about Team THANKS here). This year, I helped design our team jerseys and shorts that we plan to wear on day two in August. I have also built five carbon fiber road bikes for me and other riders.

Parts out of the box to build my current bike

Team salute last year

Our team has a pedal partner, who we thought was cancer free. But, this winter, we learned that she back in the hospital, facing a very tough battle with cancer that returned in a new form.

 Maddie in her first fight that she won against cancer

When someone so young faces a painful, daunting form of cancer, it is heartbreaking. The I only way I have to deal with something like this is to try and raise more for the PMC!!

So, that is why I PMC.


This photo taken in my first year is from the last ten-mile stretch shows
me with Keven Lewis enduring to the end demonstrating how much we can all do!!